Below is a list of reasons why we have recently seen gold and silver stocks emerging as top picks in the mining sector:
Dollar movements drove the gold and silver prices:Gold prices are highly influenced by dollar movements. The weakness in the dollar results into rise in precious commodities like gold, silver, and platinum. The falling income from bank and government also resulted into the investment in Gold, rising its demand influencing its prices to upward moves. The fall in dollar was another driving factor which led to surge in gold prices. As the US Dollar falls from the Fed’s continuation of loose money policies, it will lift up gold prices to unprecedented highs. As a result, the high reserve based gold mining companies or companies announcing the gold reserves are likely to see solid upsurge in share price. For instance, the shares of Newcrest Mining Limited (ASX: NCM) surged over 84.97% during this year to date (as of August 23, 2016). There have been reports that 18 out of the 23 gold miners (S&P 500) with a market valuation of at least $300 million have risen more than doubled while ten have at least tripled and five have quadrupled in value this year. While in case of silver miners with $ 300 million plus valuation are up between 137% - 532% year to date. Now let’s have a look on the price levels for gold this year. Gold has risen from $1060 an ounce at the beginning of the year and touched high of around $1,365 an ounce while that of silver risen from $13.84 an ounce to $20.60 an ounce. This rally was driven by the increase in demand from Central Banks and investors for gold. Moreover, growing demand for silver from the solar industry has provided a lift for physical metal prices. Even, the overall rise in underlying metals has contributed to the rally of the gold and silver miners in past few months, to a certain extent.
Gold price rally (Source: Financial Times)
Dividend players: Secondly, buying gold and silver mining stocks also allows investors the opportunity to receive dividends as many of such mining companies have remodeled themselves to withstand the volatility in the commodity markets, and now are back on track. A good number of these companies have already started or are expected to start paying dividends. Newcrest Mining had announced dividend of US7.5 cents per share recently (first time in 42 months). Northern Star Resources Ltd (ASX: NST) also declared dividend of 3 cents per share. Additionally, as gold rallies during a decade long bull run, miners borrowed heavily to invest in future output. But by late 2015, the prices plunged 46%. This forced the gold mining companies to divest their non-core assets and save costs for paying off their debts. The big gold and silver producing companies have started selling and writing down the value of the weaker operations. This resulted into rise in average reserve grade, improving realization. On the other hand, those who were buying lower quality assets have been able to pick up from attractive rising gold prices this year. Recently Australian gold miners Evolution Mining and Northern Star Resources have sold local operation gold mines for a combined consideration of $96 million.
Gold miners’ declining debt with improving average reserve grades (Source: Bloomberg intelligence)
Some gold and silver companies have been attractively priced in the recent time: Many gold stocks have been cheap despite generating solid returns this year. Some of the gold mining stocks in ASX still provide huge upside potential. Gold has risen ~27% since December, while the Gold Miners ETF Market Vector Exchange –traded fund (GDX)- a good gauge of investor interest in the mining sector, has rallied far more, nearly over 115% year to date. Experts also have said that if gold went up from its January lows to $1700, there are likely chances that gold shares would rise 2 to 3 times more than the physical gold. This has been witnessed in the past too between 2001 and 2010. Silver stocks have vastly outperformed silver bullion. Moreover, the junior mining sector is appealing from risk reward perspective. The risk is substantial for junior gold and silver mining stocks but the upside is also substantial.
Push from low yields on bonds:Low yields on bond have pushed the opportunity cost of bypassing bonds. In August, the Reserve Bank of Australia has further slashed the cash rate to 1.5%. This has made the precious metals investment more attractive. Of course, if the interest rates go up then the scenario would change pretty much.
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